We have all heard the advantages of investing in a mutual fund
over trying to pick individual stocks. First of all mutual funds
hire professional analysts that are market experts and devout
many hours of study to the various stocks. Unless you want to
devout a large portion of your free time to the study of the
financial reports, you probably won't have as much information
to make a decision as a mutual fund manager.
Then there is the well documented advantage of diversification.
Risk is reduced by holding several non correlated investments.
Put simply, some go up, some go down and combined, the return
levels off the fluctuations, or risk.
Finally, a mutual fund offers smaller investors a chance to
invest in small increments rather than having to save a large
chunk of cash to purchase 100 shares of stock.
Given the above advantages, it's no wonder that mutual funds
have become a very popular form of investing. Now there are
thousands of mutual funds to choose from, so how does one make a
selection? Here are a few tips:
1. Do not be seduced to jump on the recently performing best
fund. It may seem like the safe and rational thing to do, but
like individual stocks, you want to buy low and sell high, not
buy high and pray for more growth.
2. Even good funds may not be able to overcome the force of the
overall market. You should be looking for funds that can exceed
the broad market without increasing risk. Each fund has certain
risk parameters that it is required to follow. Read the
prospectus closely to understand what these are.
3. Limit the number of funds that you own. Unless you are trying
to simply achieve the same returns as the broad market,
diversifying into many mutual funds will not reduce your risk or
increase your return by much.
4. Funds that become too popular and too big tend to slip in
performance. There are several reasons for this.
Find more valuable mutual fund resources at
www.best-mutual-fund.info
One final point to keep in mind is that the type of fund will
totally depend on your investment objectives. There are certain
funds that are designed for your objectives be they retirement,
income, growth, funding the kids college, etc.
About the author:
Neal is an active investor and has an MBA in financial
management. For more information see
Mutual Fund
